My philosophy is that it is hard, but not impossible, to beat the market, and that it is easy, and imperative, to save on taxes and money management costs. I graduated from Harvard in 1973 with a degree in linguistics and applied math. I have been a journalist for 40 years, and was editor of Forbes magazine from 1999 to 2010. Tax law is a frequent subject in my articles. I have been an Enrolled Agent since 1979. You can email me at --williambaldwinfinance -- at -- gmail -- dot -- com.

Smart Money Strategies For Obama 2.0

We’re headed over a fiscal cliff, Medicare is going bankrupt and the soak-the-rich crowd won the election. Time to sell all your stocks and head to Singapore?

Not quite. You can make good money in a stormy economy. You can preserve wealth in a country that doesn’t respect it.

The question of the moment is what grand bargain will come out of the negotiations between the Democrats who control the White House and Senate and the Republicans who control the House of Representatives. We’ll speculate on possible outcomes and then turn to wealth-building strategies. A few of the strategies hinge on what Congress decides to do with the tax code in the next year. Most of them work under any plausible legislative outcome.

Without an enactment by Congress and assent by President Obama, several drastic things happen on Jan. 1. The Bush tax cuts expire, sending rates back to where they were before 2001, and some federal operations, especially defense, suffer automatic spending cuts. Also due to expire or already expired: a two-point cut in payroll taxes, a generous estate-tax exemption, a safe harbor from the alternative minimum tax and a large collection of small tax breaks that help either businesses or low- and middle-income families. President Obama says he wants a bill that extends the tax cuts for families with incomes below $250,000 and that he’ll veto a version that extends the cuts for wealthy taxpayers. The Republicans say they won’t tolerate any tax rate increases.

If there’s no deal, either with the Congress adjourning in December or with the slightly more Democratic one being sworn in the next month, then this is what happens: The top federal rate goes from 35% to 39.6%; back-door tax increases involving itemized deductions and personal exemptions kick in; taxes on long-term capital gains go up; couples with total income above $250,000 pay a 3.8% surcharge on investment income, and the tax break for corporate dividends goes away.

For high-incomers, the effect of all this is to push the tax on bond interest up from 35% to 44.6%, on capital gains from 15% to 25%, and on dividends from 15% to 44.6%.

A similar confrontation in 2010 ended with the Republicans getting their way; the Bush tax cuts were extended for two years for all taxpayers. This time around the President has a little more leverage. Voters repudiated the trickle-down economics of Mitt Romney (and, in California, endorsed a rate boost for high incomes), Obama doesn’t have to think about being reelected, and the $1.1 trillion budget deficit seems even less sustainable. Another downgrade of U.S. debt by rating agencies is probably around the corner.

Andy Friedman, a Washington, D.C. tax lawyer for three decades, now makes his living (at a firm called the Washington Update) advising investors what to expect from Congress and how to adjust their portfolios accordingly. His forecast: Obama stands firm on his pledge not to give a break to wealthy taxpayers but compromises by redefining “wealthy.” The Republicans could save some face if the cutoff point were moved up from $250,000 of income to $500,000.

That kind of deal would settle rates for 2013. After that a tax overhaul that cuts rates but restricts deductions is a possibility. But it’s only a possibility, and it wouldn’t be effective until 2014 at the soonest, Friedman predicts. Prosperous taxpayers, then, should figure on this: a low rate in 2012, a high probability of a high rate in 2013 and a chance of a low rate in 2014. The proper response is to accelerate income (like a bonus) from 2013 into 2012. The other side of this coin is that you can benefit by postponing itemized deductions. Make charitable contributions in January 2013 rather than December 2012.

Also think about converting a chunk of your pretax IRA into an aftertax Roth IRA. Do that by Dec. 31 and you’ll pay tax at a low rate that you may never see again. If Congress surprises you next year with a tax overhaul that lowers marginal rates, just undo the transaction. You have until Oct. 15, 2013 to reverse a 2012 Roth conversion, says Gregory Rosica, a tax partner at Ernst & Young.

What are the odds of a tax overhaul during Obama’s second term? In 1986 President Reagan engineered a rewrite of the tax code that lowered the top rate to 28% and partly paid for that cut by choking off commercial tax shelters. Don’t count on a repeat performance, says John Buckley, a law professor at Georgetown who was working as a tax expert for Congress at the time of the Reagan tax coup.

The biggest stumbling block is that the federal deficit is so much worse today. At some point, Buckley says, the Federal Reserve and Chinese banks will have their fill of U.S. Treasury bonds. The federal government has to get its deficit down to a sustainable level–meaning a deficit no larger than the growth in nominal GDP. At the moment the deficit is roughly double that.

What about curtailing itemized deductions as payment for lower rates? That would be problematic, says Buckley. Eliminating all deductions would be, besides politically close to impossible, surprisingly modest in its yield–good for only $2.5 trillion over a decade.

The country may yet grow its way out of the fiscal crisis. But you have to allow for the rising cost of government, college and medical care. With that bleak reality in mind, consider these strategies for wealth building.

AGE 25-35

1. Buy stocks. Brush off that ominous market crash during election week. If you’re buying to hold for 40 years, the fiscal cliff, the possibility of a recession in 2013 and the antics of a lame duck Congress don’t matter. The ability of risky investments like stocks to reward long-term holders is what matters.

Inside a tax-sheltered account like a 401(k), the best option is a low-cost diversified stock fund. If your company plan has a brokerage window with low commissions, use an exchange-traded fund like the Schwab U.S. Broad Market Fund (ticker:SCHB), the Vanguard Total World Stock Fund (VT), or the Vanguard Total U.S. Stock Market Fund (VTI).

Outside a tax-sheltered account? Buying individual stocks can make sense as a way to lower your management costs and increase your opportunity to harvest capital losses.

James Grant, the acerbic publisher of Grant’s Interest Rate Observer, never has a kind word for profligate governments and the central bank money printers who sustain them. But even he found a stock on the Athens exchange that he liked. In February he told his readers to buy Metka, a constructor of power plants. It so happens that Metka has most of its payroll in Greece and gets most of its revenue from outside the country. That’s a good combination. Including dividends, the stock is up 48% since Grant recommended it.

What does Grant like now? MetLife, a life insurance company that would see an earnings uptick when the Federal Reserve stops suppressing interest rates.

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Dear Mr. Baldwin, Have you ever thought about WHY a country “doesn’t respect wealth,” as you put it? Could it have to do with the fact that 2008 taught us that these days, wealth tends to be acquired by means and practices that are despicable at best and criminal at worst?

Daniel – maybe it’s not a “fact” as you believe. I work a 50-60 hour week every week, obey the governments’ laws, obey a conservative moral code, and don’t do anything that a reasonable person would consider despicable. And I pay gobs of federal income tax. Yet I have wealth. And I assure you I’m not alone. I’ll suggest it’s the long-standing role of Hollywood and the much of the major media to play out the evil wealthy theme so that it’s become an accepted truth. Yes, there are evil rich – and there are evil bums too. You’re playing a strawman fantasy.

Well Cranston at least when it all falls apart from following your CODE of self-first and the ant versus the grasshopper, at least the rest of us wont feel stupid about having worked and saved quite so hard as you to have it result in anarchy and ABJECT FAILURE! At least some of us will have raised our hands and dared to ask the obvious questions.

Romney should be paying more. Who should be paying less? A widow trying to live off the interest on Treasury bonds. In economic terms she’s breaking even–the coupon just matches what she’s losing to inflation. But she’ll owe tax on her “return.”

Our economy is more than 70 percent consumer generated, yet most of the money generated by the recovery — an estimated 90 percent — has so far gone to corporations, according to Time. Consumers remain strapped. Sterling Greenwood/Aspen

Only real solution is printing money as a stealth tax on those with lots of money. Since all the Republicans signed a lifetime idiots vow to never raise taxes ever ever ever this is the only logical alternative. Cutting services to bone (the glorious austerity approach) is a complete failure because we already have people homeless and hungry, we already have people without health care and elderly without medicine, already have mentally ill people going untreated at everyone’s peril, we already have veterans going without benefits they were promised, we already have over 14 million children in America that go to bed hungry most nights every week.

If another country were doing this to our people and our children and elderly we’d be at war, yet the Republicans have the unrestrained gaul to talk about Austerity?

The comment about not respecting wealth is despicable and has no place in our public discourse. Tax increases are used to pay for things republicans already spent, wars, tax cuts, a Medicare drug plan etc. Spending cuts will NOT pay down a single penny of debt.

Every modern republican president left office with significantly higher deficits than when he took the oath of office. Is this an example of ‘respecting wealth?’

I can’t help but believe that our elections aren’t about liberals or conservatives. They’re about protecting the status quo or not.